T-506-73
The Queen (Plaintiff)
v.
Sam Shok (Defendant)
and
T-507-73
The Queen (Plaintiff)
v.
Ben Luffman (Defendant)
and
T-508-73
The Queen (Plaintiff)
v.
Benjamin Stone (Defendant)
and
T-509-73
The Queen (Plaintiff)
v.
Waldorf Hotel (1958) Co. Ltd. (Defendant)
Trial Division, Smith D.J.—Winnipeg, January
15-17, March 20, 1975.
Income Tax—Purchase of hotel—No value allocated for
goodwill—Whether goodwill in beer and liquor licences—
Income Tax Act, R.S.C. 1952, c. 148 as am. ss. 11(1)(a),
20(1)(a) and (b) and 20(6)(g).
The Bell Hotel, an establishment licensed for the sale of
beer, wine and liquor was purchased by defendants for $405,-
000. The Minister accepted this figure, but allocated $96,350
for goodwill. Defendants' appeal was upheld by the Tax Review
Board.
Held, the Minister's appeals are allowed. There were no real
negotiations between the seller and defendants as to allocation
of values. The vendor was not concerned about the allocation,
but only about the price. The Minister is not bound by alloca
tions in the offer, and is not prohibited from considering
whether goodwill or other valuable items were included in the
property, though not mentioned in the offer. Defendants
attached great importance to the licences; the sale of alcoholic
beverages was and will likely remain the hotel's most valuable
source of revenue.
Section 20(6)(g) of the Act deals with "depreciable proper
ty" and "something else". In applying the section, it need only
be shown that, in addition to "depreciable property", "some-
thing else" was included in the purchase price. The fact that
goodwill was "present in the mind" of the purchasers is suffi
cient to constitute "something else". While ordinarily, the price
of an asset arrived at through bona fide arm's length negotia
tions should establish the value, "evidence with respect to the
reasonableness" of the allocations is to be considered "where
the purchaser and appellant were never ad idem concerning the
valuations".
Bohun, Bohun and Reynolds v. M.N.R. 72 DTC 1268;
Coopérative Agricole de Granby v. M.N.R. 70 DTC 1620,
and Noralta Hotel Limited v. M.N.R. [1954] Ex.C.R.
317, distinguished. Klondike Helicopters Ltd. v. M.N.R.
[1966] Ex.C.R. 251 applied. Kamsack Hotels Limited v.
M.N.R. 66 DTC 9, and Chartrand v. M.N.R. 64 DTC
433, considered. Canadian Propane Gas and Oil v. M.N.R.
73 DTC 5019, Payne Transport Limited v. M.N.R. [1964]
Ex.C.R. 1, and Harris v. M.N.R. [1965] Ex.C.R. 653,
followed.
INCOME tax appeal.
COUNSEL:
M. Storrow and J. Weinstein for plaintiff.
R. Soronow, Q.C., for defendants Shok, Luff-
man and Waldorf Hotel.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Levin, Soronow and Harris, Winnipeg, for
defendants Shok, Luffman and Waldorf
Hotel.
The following are the reasons for judgment
rendered in English by
SMITH D.J.: These four cases come before this
Court as appeals by way of trial de novo by Her
Majesty The Queen from decisions of the Tax
Review Board which set aside assessments against
the defendants for income tax in respect of the
income derived by the defendants as the owners (in
varying percentages) of the Bell Hotel in
Winnipeg.
On motion made by Mr. Weinstein, counsel for
the plaintiff, on December 18, 1974, this Court
ordered that, as the facts and the issues were the
same in all four cases they be heard together on
common evidence, and fixed the time and place of
the trials for the 15th day of January 1975 at the
City of Winnipeg in Manitoba, commencing at
10:30 A.M.
On motion made by Mr. Soronow, counsel for
the defendants, on the same day this Court
ordered that Mr. Soronow be permitted to retire as
solicitor and counsel for Benjamin Stone, but con
tinuing to represent the other three defendants.
Mr. Soronow was directed to notify Mr. Stone that
the trials would begin in Winnipeg on January 15,
1975 and that if he wished to be represented by
counsel he should engage counsel for the trial of
his case. Mr. Stone was not present or represented
by counsel at any time during the hearing of these
appeals.
This Court further ordered that the costs of the
plaintiff occasioned by the motion to consolidate
the four trials be awarded against the defendant
Benjamin Stone in any event of the cause and that
the costs of the plaintiff occasioned by the said
motion in respect of Sam Shok up to and including
December 16, 1974, be awarded against the
defendant Sam Shok.
The relevant facts in these cases are not the
subject of much dispute and may be stated as
follows:
The Bell Hotel is located at the north-west
corner of Main Street and Henry Avenue, in Win-
nipeg, having a frontage on Main Street of 43 1 / 2
feet and a depth along Henry Avenue of 124 1 / 2
feet. It was built in 1906 of brick construction with
stone trim. It has four storeys above ground and a
full stone basement. There are 62 residential
rooms for rent plus a four-room suite which has
been occupied for a number of years by the hotel
manager. The front portion of the main floor
contains the lobby, hotel office and counter area,
beer vendor sales counter and beer cooler rooms,
also a licensed restaurant (36 person capacity) and
kitchen area. In the rear, occupying much the
greater portion of the main floor, are the men's
and the mixed beverage rooms, with 168 seats and
capacity for 135 persons. The basement contains
beer coolers in addition to heating, refrigeration
and compressor equipment.
For many years the hotel has been licensed for
the sale of beer and wine in its beverage rooms and
restaurant and through its beer vendor facilities,
and since 1970 it has also been licensed for the sale
of liquor for consumption on the premises.
In 1962 the hotel was purchased by Oswald La
Freniere from Labatt's Brewery for $75,000 and
sold by him in 1967 to the defendants Waldorf
Hotel (1958) Co. Ltd., and Benjamin Luffman or
their nominees for $415,000, reduced shortly after
wards to $405,000. In the result the four defend
ants became the purchasers of the hotel. While he
was the owner Mr. La Freniere made capital
expenditures on the building and new equipment
of $80,000, so that his total investment in the hotel
was about $155,000. For many years prior to
purchasing the Bell Hotel Mr. La Freniere had
managed a succession of hotels for Labatt's and in
the recent years had been supervisor of several
hotels for that brewing company. It seems clear
that Labatt's sold the Bell Hotel to him at a very
low price.
The offer to purchase the hotel from Mr. La
Freniere (Exhibit 2 in these proceedings) was
made after fairly lengthy negotiations in which
price and terms had been discussed verbally, but
Exhibit 2 was the only written offer submitted on
behalf of the defendants.
From the evidence of the defendant Luffman
and of Benjamin Stern, a long-time friend of his,
who was, at the time of the purchase, and still is
co-owner with a Mr. Green of the Waldorf Hotel,
the chief purpose in acquiring the Bell Hotel was
to provide Luffman with a job. Prior to 1966
Luffman had been in the poultry business, but he
sold that business in 1966. The idea was developed
that a hotel be purchased of which Luffman would
be manager though he had never been in the hotel
business prior to this time. Stern, or the Waldorf
Hotel, would provide part of the capital for the
purchase as Luffman could not finance it on his
own. In the end the defendants Shok and Stone
also provided part of the capital, ownership of the
Bell Hotel being divided among the defendants
after the purchase as follows:
Waldorf Hotel (1958) Co. Ltd. 50%
Benjamin Luffman 25%
Sam Shok 12 1 / 2 %
Benjamin Stone 121/2%
The offer, Exhibit 2, bears the date November 28,
1967. It was accepted on November 30, 1967 by
Mr. and Mrs. La Freniere, subject to certain
conditions, which conditions were accepted by Mr.
Stern and the defendant Luffman on December 8,
1967. The defendants took possession on February
1, 1968, since which date Luffman has been the
manager of the hotel. Both the conditional accept
ance of the offer by Mr. and Mrs. La Freniere and
the acceptance of the conditions by Stern and
Luffman form part of Exhibit 2.
In this document, at the end of nine conditions
to which the offer to purchase was stated to be
subject, the following appears:
The price being offered for the said hotel is based on the
following values:
Land $ 15,000
Building 310,000
Contents 60,000
Equipment 30,000
Total $415,000
It is clear that the four items, as valued, make
up the total purchase price for the hotel, nothing
being allowed for goodwill, liquor or beer licences.
According to Mr. Stern and Mr. Luffman, they
made these values a condition of the purchase.
When the total price was reduced to $405,000, the
defendants reduced the value allocated to the
building from $310,000 to $300,000. The defend
ants rely heavily on these values as having been
agreed to by the sellers and purchasers negotiating
at arm's length. The evidence on this question of
the allocation of values will be examined almost
immediately. At this point it is essential to note
two facts because they are the cause of the whole
issue in this case. First, all of the hotel assets
valued above, with the exception of the land valued
at $15,000, are items in respect of which capital
cost allowances for depreciation are permitted
under the Income Tax Act, the amount of such
allowances being deductible from the taxpayer's
income, thereby reducing the income tax payable
by him. Second, goodwill and the value of licences
are not depreciable assets for income tax purposes.
The Minister of National Revenue accepted the
total price of $405,000 for the hotel, but did not
accept that no value should be allowed for good
will. He assessed the defendants for income tax for
the 1968 taxation year on the basis that a reason
able allocation of the purchase price was:
Land $ 45,000
Building 160,800
Contents and equipment 102,850
Goodwill 96,350
Total $405,000
On this assessment the defendants could claim
depreciation or capital cost allowances in respect
of the second and third items only, i.e., on property
valued at $263,650, instead of, as claimed by the
defendants, on property valued at $390,000. The
defendants appealed the Minister's assessment.
The Tax Review Board allowed the appeals and
referred the assessments for 1968 back to the
Minister for re-assessment. The present appeals
are from that decision.
As stated above the defendants rely heavily on
the accepted offer to purchase the hotel (Exhibit
2) and particularly on the allocation of values of
the hotel assets contained therein, which allocation
is found at the end of a list of conditions to which
the making of the offer is stated to be subject.
The defendants do not rely alone on the simple
presence in the offer of this allocation of values
provision. Both Luffman and Stern gave evidence
that during the negotiations there had been discus
sions about this matter and that Mr. La Freniere
had no objection to the allocation. In addition their
counsel submitted that on the evidence this was
clearly a case of a bona fide agreement made
between people dealing at arm's length. He further
submitted that under the law, if an arm's length
bona fide agreement is made between parties who
are knowledgeable in their business, the onus is on
the Minister to show that there was some sham or
subterfuge in the transaction, and that otherwise
the valuations in the agreement must govern as to
the depreciable assets.
On the other hand Mr. Luffman, who stated
that the negotiations for the purchase of the hotel
extended over a period of approximately three
months, with discussions occurring about four
times a week, said that the price and the amount
of the down payment were the main things dis
cussed. He did not recall what the breakdown of
values was, either during the course of the negotia
tions or in the offer to purchase.
Mr. La Freniere stated that the allocation of
values of assets shown in the offer to purchase was
never discussed with him. He didn't know how the
valuation figures were arrived at. He did recall
discussions about $10,000 worth of repairs being
required by the Liquor Commission, as a result of
which he agreed to reduce the price of the hotel
from $415,000 to $405,000. The only things he was
concerned about were the price and the amount of
the down payment. If the purchasers wanted those
values stated in the offer it was all right with him.
On these matters he had no doubts and his evi
dence was not shaken on cross-examination.
Both Luffman and Stern were questioned about
goodwill, and the value of the beer licences. Nei
ther agreed that any value should be allotted to
goodwill or to the value of licences for alcoholic
beverages, but when asked if they would have
bought the hotel without these licences Luffman
said "No, we couldn't run the hotel without the
licences." Stern's evidence on this point was to the
same effect. The clear inference is that in Luff-
man's and Stern's opinions, the licences had a
value. Mr. La Freniere was questioned about the
value of the licences to the hotel. He stated that
the hotel, without the liquor licences, was worth
half the price he got. He was emphatic on this
point. In his view clearly the licences added a great
deal to the value of the hotel.
The defendants pointed to the fact that a holder
of a beer or liquor licence cannot assign it to
anybody and that a purchaser of a licensed hotel
must satisfy the Liquor Commission that the
premises are satisfactory and that he is himself a
suitable person to be granted such licences, for
which he must make application. All this is true,
but it does not follow that beer and liquor licences
have no value. The number of licences that the
Liquor Commission will grant in any given area is
limited, and there is nothing to prevent a hotel
owner wishing to sell his hotel as a going concern
from capitalizing what he considers to be the value
of his existing licence and including that value in
his asking price. This is what Mr. La Freniere did
and thus obtained, according to his evidence, about
twice as much as the hotel was worth without the
licences. Mr. La Freniere impressed me as being
an honest witness. He had been in the hotel busi
ness for many years and it is safe to assume that
he knew how those in the business regard the value
of liquor licences to a hotel. He was also an
independent witness in so far as the issues in this
action were concerned. I see no reason to doubt his
evidence and I accept it as being substantially
correct. I am satisfied that there were no real
negotiations between him and the defendants
about the allocation of values to land, buildings,
contents and equipment, and that though he
accepted the offer containing the values given to
those items by the offerors, those values do not
represent his own opinion. He was not concerned
about the allocation of values but only about
the price for the hotel as a going concern and
about the amount of the cash down payment. If
the purchasers wanted to place values on various
items of property that was, in his view, their
business and he had no objection.
I attach considerable importance to the evidence
of Mr. La Freniere. He was not called as a witness
before the Tax Review Board, which therefore did
not have the benefit of his evidence in their
deliberations.
In these circumstances I do not consider that the
Minister is bound by the allocation of values con
tained in the offer to purchase or that he is prohib
ited from considering whether goodwill or other
items having a monetary value were in fact includ
ed in the property purchased though not men
tioned in the offer to purchase, and assessing the
value of such goodwill or other items.
That the defendants themselves attached much
importance to the liquor licences is further shown
by a clause in the offer to purchase, as it was
finally accepted. By this clause it was provided
that the offer to purchase was "subject to the
Purchasers being approved as Licensees by the
Liquor Control Commission and should the Pur
chasers not be approved, the Offer to Purchase is
to be considered cancelled, null and void and the
Purchasers' deposit returned to them."
This clause obviously indicates that unless the
purchasers could obtain liquor licences they would
not purchase the hotel.
One additional opinion is cited here, that of Mr.
E. Karl Farstad & Associates Ltd. Mr. Farstad,
an expert real estate appraiser and member of The
Appraisal Institute of Canada, of long and varied
experience, including much experience in valuing
hotel properties in the downtown area of Win-
nipeg, made an appraisal of the Bell Hotel for the
Department of National Revenue. Both his prelim
inary report, dated January 18, 1972 (Exhibit 7)
and his final updated report (18 single space type
written pages plus appendices) dated December
24, 1974 (Exhibit 6) contain the following
paragraph:
The subject property does not, however, depend upon its income
producing ability from rooms but rather from the sale of beer
and liquor. With the difficulty of obtaining a license today for
new hotels with 40 to 60 rooms and beer parlors, older hotels
such as the subject property do have a value not so much for
land, building and chattels as for the value of the license for the
sale of beer and wine.
Strong support for the conclusion that the liquor
licences for the Bell Hotel have been of consider
able value is found in the annual financial state
ments certified by its auditors for the years since
the present owners took possession and in the
unaudited financial statement (Exhibit 3) for the
last full year of Mr. La Freniere's ownership.
Exhibit 3 shows that in the year September 1,
1966 to August 31, 1967 sales of beer and wine
totalled $196,065.51, with a gross profit of
$88,130.60. The total revenue from room rentals
for the year was $35,476.08 and the gross profit on
food and tobacco $1,428.55. Thus, on the basis of
business done the sales of beer and wine were
about 5' times the room rentals and the gross
profit from the sale of beer and wine about 2'
times the total revenue from room rentals. The
total operating expenses of the hotel are stated at
$86,353.99, which is less than the gross profit on
beer and wine by $1,776.61. Thus all operating
costs could have been paid out of liquor profits,
leaving a small profit, apart from interest on debt
and depreciation.
Unfortunately, neither on Exhibit 3 nor on the
audited statements for succeeding years (Exhibits
5 and 4) is there any breakdown of operating
expenses between the liquor business, room opera
tion, restaurant, kitchen, tobacco stand, manage
ment or any other part of the hotel's business, but
it is obvious that a substantial part of the
$86,353.99 of operating costs is properly charge
able against other things than the beer and wine
business.
The picture shown by the later auditors' reports
is very similar to that indicated by Exhibit 3.
Exhibit 5 covers the 9 month period from Febru-
ary 1, 1968 to October 31, 1968. It shows
(Schedule B) beer and wine sales totalling $133,-
121.83, with a gross profit of $52,531.23. Schedule
B also shows food sales of $1,586.37 with a gross
profit of $996.57 and cigarette sales of $7,538.96
with a gross profit of $774.66. Schedule A shows
room rentals of $26,636.67.
Exhibit 4 is the financial statement for the year
ending October 31, 1970, with the comparative
figures for the previous year. In the year ending
October 31, 1969 sales of beer and wine totalled
$167,372.17 with a gross profit of $66,328.19.
Sales of food were $2,569.43 with a gross profit of
$993.46. Sales of tobacco were $12,232.73, with a
gross profit of $1,323.48. In the year ending Octo-
ber 31, 1970 spirituous liquors were sold in addi
tion to beer and wine. Schedule C to the Exhibit
shows sales of beer, wine and liquor of $172,-
630.62 with a gross profit of $68,491.96. Sales of
food were $2,836.79 with a gross profit of
$1,483.50. Sales of tobacco were $12,495.70 with
a gross profit of $1,888.10. Room rentals for the
year ending October 31, 1969 are shown in
Schedule B at $37,026.06 and for the subsequent
year at $33,014.05.
Financial statements for years subsequent to
that ending on October 31, 1970 were not put in
evidence. Exhibits 4 and 5 show that while sales
and gross profits on beer and wine declined in each
of the first three years of the new owners' opera
tion of the hotel, the addition of spirituous liquor
to the beverages sold in 1970, (sales $13,057.82
and gross profits $6,929.81) resulted in total sales
and gross profits on alcoholic beverages being a
little higher than in 1969. There is no doubt that
the sale of alcoholic beverages continues to be by
far the biggest item of business and source of
revenue in the hotel's operation.
Goodwill is often regarded as the likelihood that
the customers who have been attracted to a place
where business is carried on and have bought its
products or services will continue to do so. The
likelihood that this will happen has a value to the
owner of the business. When he sells the business
the owner's estimate of this value is commonly
added to the asking price of the physical assets and
the purchaser commonly agrees to pay a price that
includes an amount not greater than he thinks the
asset of goodwill is worth. In the case of the Bell
Hotel very little could be allowed for goodwill in
respect of room rentals. For the 4 years for which
room rental figures were quoted above the total
room rental varied from about $33,000 to $37,000
per year or an average annual total revenue of
about $35,000. The hotel has 62 rooms for rent.
Multiplying this number by 365, produces a total
of 22,630 room days in a year. Gross revenue of
about $35,000 per year represents an average daily
rent receipt per room of a little over $1.50. The
defendants' evidence was that the rooms rented at
from $3.00 to $7.00 per day, but that a number of
them were actually rented by the month at rates
less than $3.00 per day. Whether or not these
figures indicate a fairly high level of vacancy in
the rooms it is clear that rental receipts are very
low for the number of available rooms. Unques
tionably, from the evidence, many customers have
continued to patronize the beverage rooms and
beer vendor facilities in the hotel. Unquestionably
also the value to the hotel's business of the several
licences for alcoholic beverages is considerable. It
seems likely that with reasonably good manage
ment, this state of affairs will continue. Having in
mind the great increase in building costs that has
taken place in recent years it seems unlikely that a
new hotel could be built in the area near the Bell,
particularly one of comparable size, and be oper
ated at a profit, even if it were certain (which is
not the case) that similar licences could be
obtained for such new hotel. This circumstance
adds to the likelihood that the licences held by the
Bell and by other hotels in the area will continue
to be valuable assets.
The question then arises: How much value
should be attributed to the licences, or goodwill,
whichever term is used? All parties seem to be in
agreement that $405,000 was a fair price for the
hotel as a going concern. This price was arrived at
after lengthy negotiations between Mr. La Fre-
niere and the purchasers. The Minister accepted
the figure of $405,000, so arrived at, as fair. Mr.
Van Iderstine, chief of the Estates and Trustee
Section, Department of National Revenue, Win-
nipeg, clearly assumed that $405,000 could be
taken as a fair value for the hotel as a going
concern. So also did Mr. Farstad, in preparing his
company's report.
I see no reason to differ from this unanimous
view.
The question then resolves itself into making a
proper allocation of values of the various items of
the hotel property, so as to arrive at a total of
$405,000.
I was much impressed by the scientific methods
for ascertaining values adopted by Mr. Farstad
and shown in his report. His explanations of his
methods and the values resulting therefrom stood
up well under cross-examination. In my view his
appraisal method was much more thorough than
that followed by Mr. Iderstine and his staff. No
evidence of this expert kind was tendered by the
defendants, who relied entirely on the agreement
to purchase and the allocation figures contained
therein ascribing the whole purchase price of
$405,000 to physical property items. After study
ing all the evidence at length I have come to the
conclusion that Mr. Farstad's valuations are more
likely to be substantially correct than either those
in the agreement or those of Mr. Iderstine and his
staff. Mr. Iderstine's valuations were those adopt
ed by the Minister in assessing the defendants for
income tax for the 1968 taxation year.
Mr. Farstad's valuations are:
Land $ 25,000
Building 200,000
Contents of building 75,000
Goodwill 105,000
Total value $405,000
Mr. Farstad had come to the conclusion that:
"I cannot see a value for goodwill of less than $100,000."
As his valuations of land, building and contents
totalled $300,000 he fixed the value of goodwill at
$105,000, thus making his overall total $405,000. I
think this was reasonable.
Mr. Weinstein, counsel for the plaintiff, and
Mr. Soronow, counsel for all the defendants except
Stone, who was not present or represented by
counsel, cited a number of cases to the Court.
Several of these cases I shall now consider, first
quoting the relevant provisions of the Income Tax
Act, which are:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a taxation
year.
(a) such part of the capital cost to the taxpayer of property,
or such amount in respect of the capital cost to the taxpayer
of property, if any, as is allowed by regulation;
20. (1) Where depreciable property of a taxpayer of a pre
scribed class has, in a taxation year, been disposed of and the
proceeds of disposition exceed the undepreciated capital cost to
him of depreciable property of that class immediately before
the disposition the lesser of
(a) the amount of the excess, or
(b) the amount that the excess would be if the property had
been disposed of for the capital cost thereof to the taxpayer,
shall be included in computing his income for the year.
20. (6) For the purpose of this section and regulations made
under paragraph (a) of subsection (1) of section 11, the follow
ing rules apply:
(g) where an amount can reasonably be regarded as being in
part the consideration for disposition of depreciable property
of a taxpayer of a prescribed class and as being in part
consideration for something else, the part of the amount that-
can reasonably be regarded as being the consideration for
such disposition shall be deemed to be the proceeds of
disposition of depreciable property of that class irrespective
of the form or legal effect of the contract or agreement; and
the person to whom the depreciable property was disposed of
shall be deemed to have acquired the property at a capital
cost to him equal to the same part of that amount;
The first case referred to by Mr. Soronow was
Bohun, Bohun and Reynolds Construction Lim
ited v. M.N.R. 72 DTC 1268. This is a Tax
Review Board decision, the case being heard by J.
O. Weldon, Q.C. The Bohuns were vendors of a
construction business and Reynolds was the pur
chaser. The agreement of sale allocated 50% of the
purchase price to depreciable assets and 50% to
non-depreciable assets. In its income tax returns
Reynolds disregarded the allocation set out in the
agreement and claimed capital cost allowance on
the basis that the full purchase price had been paid
for the depreciable assets. The Minister disallowed
this deduction. It was held by the Tax Review
Board that the allocation in the agreement must
govern.
In his reasons for the decision Weldon, Q.C.
cited Klondike Helicopters Ltd. v. M.N.R. [1966]
Ex.C.R. 251, an Exchequer Court case in which
Thurlow J., in considering the application of sec
tion 20(6)(g) of the Income Tax Act, said, at page
254:
... if the contract purports to determine what amount is being
paid for the depreciable property and is not a mere sham or
subterfuge its weight may well be decisive.
At page 1271 Weldon, Q.C. said, in part:
1. Since the above Agreement dated July 13, 1965 [the agree
ment between the Bohuns and Reynolds] is, obviously, not a
sham or subterfuge, it should be regarded, in accordance with
the decision of the Exchequer Court in the Klondike Helicop
ters case (supra), as establishing the relative values of the
property sold.
Here it is noted that, in the Klondike case
Thurlow J. did not say the weight of what is said
in the agreement, concerning depreciable property,
must be decisive, but only that it may well be
decisive. He also stated that it was one of the
circumstances to be considered.
Nor did Weldon, Q.C. say that in all cases the
agreement must be decisive. He went on to say (at
page 1272) that the agreement had been drawn by
Reynolds' own solicitors and then proceeded:
3. The evidence before me in this matter makes it clear beyond
all peradventure of a doubt: that the breakdown of the purchase
price in the said Agreement was unquestionably, intended by
the Vendors (Dick Bohun and Peter Bohun) and similarly
accepted by the Purchaser (Reynolds) as an important and
essential term of the said Agreement and one that went to the
very root thereof, ... that the Vendors (Dick Bohun and Peter
Bohun) and the Purchaser (Reynolds) under the said Agree
ment were fully and completely aware at all relevant times of
the tax implications flowing from the breakdown of the pur
chase price in the said Agreement, and that the said breakdown
in the purchase price governed, first, the amount of recapture
of capital cost allowance which would be added in due course to
the taxable incomes of the Vendors (Dick Bohun and Peter
Bohun) in their respective 1965 taxation years, and secondly,
the amount of depreciation or capital cost allowance which the
Purchaser (Reynolds) would be entitled to claim as a deduction
from its income in its 1966 and subsequent taxation years.
In the present case I am satisfied, on the evi
dence of Mr. La Freniere, that the breakdown of
values was not of his doing, but was placed in the
offer to purchase by the purchasers and that there
was no real bargaining about it, certainly nothing
that could possibly be designated "hard bargain
ing" such as clearly occurred in Bohun and Rey-
nolds. Further, though Luffman and Stern admit
ted that they knew the breakdown of values in the
present case might have tax implications, there is
no evidence that La Freniere was aware of it. If he
had known, he would likely have been concerned
about the tax implications of the breakdown for
him, but he was not concerned in any way about
the breakdown or its effect.
One other circumstance should be noted. In the
Bohun and Reynolds case a party to a breakdown
of values, agreed to after hard bargaining, sought
to change that breakdown, unilaterally, to his own
tax advantage, and to the detriment of the other
party. That is not the situation before me. Thus
the circumstances of Bohun and Reynolds differ
materially from those in the present case.
Weldon, Q.C. did say, at page 1273 in the
Bohun and Reynolds case:
It is my opinion that section 20(6)(g) is not in the Act for the
purpose of authorizing the Minister to change the breakdown
of a purchase price in an agreement unless such an agreement
is a sham or subterfuge.
In my view, if this statement is intended to mean
that in no circumstances can the Minister change
the breakdown of a purchase price unless he proves
that the breakdown is a sham or subterfuge, it is
much too broad. The circumstances must be taken
into account and may lead to a different
conclusion.
Coopérative Agricole de Granby v. M.N.R. 70
DTC 1620 is a Tax Appeal Board decision and is,
so far as relevant to the case before me, similar to
the Bohun case (supra). The appellant Coopéra-
tive purchased a dairy business for $410,000. In
the deed of sale, it was agreed by the appellant and
the vendor that the depreciable machinery and
equipment were being sold at their undepreciated
capital cost as defined by the Income Tax Act.
Their undepreciated capital cost was $107,217. A
few months after the purchase the appellant had
an expert appraisal made of the machinery and
equipment, which resulted in an appraised value of
$256,472. The appellant then claimed in its
income tax return, capital cost allowance based on
the $256.472 figure. The Minister disallowed the
claim, granting capital cost allowance on $107,217
only.
Mr. Maurice Boisvert heard the case before the
Tax Appeal Board. He stated, at page 1623:
There is no doubt that the contracting parties were dealing at
arm's length and that the property sold included some which
was depreciable. That has been admitted and proven. Nor is
there any doubt that the consideration ($410,000) covered
certain depreciable property and other undepreciable assets.
The total price must therefore be apportioned among the
various assets purchased. That was done by the Grantor and
the Grantee. I do not see how, for income tax purposes, the
value allotted to the various assets would be changed on the
basis of an appraisal subsequent to the purchase.
Later, on the same page, he referred to the
appellant's claim that the value of the depreciable
assets as agreed to by the parties was not reason
able and should be increased to the expert
appraised value of $256,472. He then said:
Whether it is reasonable or not is irrelevant provided that the
contracting parties have reached agreement on the value, as is
the case here. The appellant agreed to pay $107,217 for the
depreciable property and it cannot henceforth change its valua
tion. Allowing such a change would mean that property which
has benefited by a capitai cost allowance in order to take
depreciation into account would enjoy, at the expense of the tax
authorities, a further capital cost allowance on what has
already been depreciated. This is what the legislator wanted to
prevent and avoid.
His decision was clearly founded on the fact
that the parties had negotiated in good faith, at
arm's length, and that in the course of so doing,
they had agreed upon and fixed the value of the
depreciable assets.
In the present case, as stated (supra), there was
no real bargaining about the value of the depre-
ciable assets. It is also noted that in the Coopéra-
tive Agricole case "goodwill" was expressly and
separately listed among the items being purchased
while in the present case all the purchase price of
$405,000 was divided among certain specified
items, with no mention being made of "goodwill".
Kamsack Hotels Limited v. M.N.R. 66 DTC 9.
This is a Tax Appeal Board decision of a case
heard in November, 1965. Three hotels were pur
chased, together with furniture and equipment. No
mention was made of goodwill. The Minister
rejected the company's valuations for capital cost
allowance purposes, claiming somewhat different
valuations in certain classes of property and
including an amount for goodwill, all on the basis
of appraisals made for the Minister. It was held
that no goodwill had been established. To that
extent the appeal was successful. However, the
matter was referred back to the Minister for
reconsideration and re-assessment of the appor
tionment of the purchase price among the various
tangible assets.
Chartrand v. M.N.R. 64 DTC 433.
This was a Tax Appeal Board case heard by Mr.
Maurice Boisvert.
In this case also it was held, on the evidence,
that no value whatever had been shown for good
will and that the buildings were worth about what
they cost the appellant. The appeal was allowed.
The earliest case referred to by Mr. Weinstein
was Noralta Hotel Limited v. M.N.R. [1954]
Ex.C.R. 317. This was an Exchequer Court case
decided by Thorson P. in 1954. It was cited by Mr.
Weinstein chiefly because it contains a statement
concerning assessments made by the Minister. In
that case the appellant had claimed that the cost
of furniture and equipment bought with a hotel
was $100,000 as stated in the agreement to pur
chase, and that it was entitled to a capital cost
allowance based on that amount. The Minister had
determined that the actual cost of the furniture
and equipment was $35,000. At page 319 the
learned President said:
The assessments carry a statutory presumption of their valid
ity and stand until they have been shown to be erroneous in fact
or in law.
On the facts it was held not merely that the
appellant had not shown the Minister's assessment
of $35,000 to be in error but that that assessment
was more than ample. The appeal was dismissed.
In the present case the defendants have pro
duced no evidence to prove the Minister's assess
ment wrong, other than the agreement to pur
chase, with its valuation table allocating the entire
purchase price to land, building, contents and
equipment, i.e., items of tangible property. As
indicated earlier, in my opinion this is not a case in
which the valuations in the agreement must be
accepted as binding. Judgment might be given for
the plaintiff on these facts alone. But the plaintiff
went further. In addition to the allocation of values
made within the Department by Mr. Iderstine and
his staff, on which the Minister based his assess
ment, the Department engaged an expert
independent appraiser, Mr. Farstad, to value the
property purchased. His report and the valuations
in it constitute the most cogent and reliable evi
dence of fact and opinion before this Court.
The plaintiff's counsel placed much reliance on
two other cases:
Canadian Propane Gas & Oil Limited v. M.N.R.
73 DTC 5019; Herb Payne Transport Limited v.
M.N.R. [1964] Ex.C.R. 1.
In both these cases there was a good deal of
discussion about section 20(6)(g) of the Income
Tax Act, R.S.C. 1952, c. 148. Before dealing with
the two cases I think it worthwhile to note that
section 20(6)(g) speaks of "depreciable property"
and "of something else". It does not identify
"goodwill" or any other kind of property that is
not depreciable. Thus, where this provision is
applied it is only necessary to show that, in addi
tion to "depreciable property", "something else"
was included as being bought for the purchase
price.
The Canadian Propane Gas case was heard in
November 1972 by Cattanach J. in the Federal
Court, Trial Division.
The essential facts and the reasons for judgment
are well summarized in the headnote:
Capital cost allowances—Acquisition of businesses by purchase
of assets—Expectation of purchaser of succeeding to vendors'
customers—Part consideration attributable to depreciable
assets and part to "something else"—Fair market value of such
assets—Onus of proof—Income Tax Act, R.S.C. 1952, ss.
11(1)(a) and 20(6)(g) [See s. 20(1)(a) of the new Act].
The appellant corporation carried on the business of dealing in
liquid and gaseous hydrocarbons, principally in selling propane
gas to consumers. It expanded its business by acquiring the
businesses of other retailers of the gas by purchasing the assets
of such other businesses and, if necessary, by purchasing their
shares as well. Having completed the purchases of three such
businesses, two of which were reassessed for the recapture of
capital costs by reason of their having received from the
appellant more than the depreciated figure for the assets in
question, the appellant used the figures in the written agree
ment for its capital cost allowances. The Minister, in assessing
the appellant, invoked the provisions of section 20(6)(g) and
reduced the capital cost of certain of the depreciable assets. He
did this by ascertaining the fair market value of the relevant
assets and treating the balance of the consideration as being for
"something else" within the meaning of the section. The appel
lant appealed to the Federal Court—Trial Division, contending
that the negotiated values between the parties to each agree
ment, attributable to the depreciable property, were the correct
figures and that the section invoked by the Minister was not
applicable.
Held: The appeal was dismissed. There were provisions in
each agreement designed to ensure that the customers of the
vendors would become the customers of the appellant and that
was sufficient to constitute "something else", to which part of
the consideration might reasonably be regarded as attributable
and accordingly, the section was applicable. The businesses
were bought and sold as going concerns, the consideration
being tailored to fit each vendor's price for its business and as
there was no hard bargaining as to the attribution of amounts
to depreciable property, the figures in the agreements were not
decisive of what was reasonable. The Minister's figures, having
been accepted as accurate by the appellant, the onus for
demolishing the assumptions upon which his calculations were
based fell on the appellant and it had failed to discharge such
onus. Accordingly, it could not be said that the Minister's
assumptions were not warranted and the amounts allocated by
him to the depreciable property were correct.
At page 5026, Cattanach J. after quoting section
20(6)(g), said:
In applying principles outlined in the above section the matter
for determination is not simply one of interpreting the contract
or agreement or of giving effect to its provisions. The section
states that the part of the amount that can reasonably be
regarded as being the consideration for depreciable property
shall be deemed to be the proceeds of disposition irrespective of
the form or legal effect of the contract or agreement.
[Problem to be decided]
Rather the first problem to be decided is whether the amount
can be regarded as being in part the consideration for depre-
ciable property and as being in part consideration for some
thing else. In short is section 20(6)(g) applicable.
If the first problem is answered in the affirmative the next
problem that arises for determination is what amount of the
total can reasonably be regarded as consideration for the
depreciable property and what amount of the total can be
reasonably regarded as consideration for something else. It
seems to me that the determination of the foregoing respective
amounts can best be determined by ascertaining the reasonable
value of the property and the deduction of that amount from
the total consideration results in the amount attributable to
something else.
In the Canadian Propane case no allowance had
been made for "goodwill", one of the appellant's
principal witnesses stating that the appellant con
sidered it had no value. But as Cattanach J. said,
at page 5027:
The fact that no value is assigned to goodwill in the agree
ments is not conclusive of the matter.
Cattanach J. referred to the appellant's (purchas-
er's) expectation of succeeding to the vendors'
customers and then said, bottom of page 5027:
It is not necessary for me to categorize such an expectation
in the appellant as goodwill which is, of course, a non-depre-
ciable asset. It was a factor present in the mind of the appellant
in making the purchases and that is sufficient to constitute
"something else" within the meaning of section 20(6)(g) to
which an amount may be reasonably regarded as attributable.
This being so it follows that section 20(6)(g) is applicable to
the transactions here in question.
The paragraph just quoted has direct applica
tion to the present case. Certainly also, the expec
tation of succeeding to the licences held by Mr. La
Freniere was a factor in the minds of the defend
ants when purchasing the Bell Hotel. Put in
another way, Mr. La Freniere, in selling the hotel,
was giving up his valuable licences and the defend
ants were to acquire them, as shown by the condi
tion that unless they obtained the licences their
purchase was to become null and void.
Cattanach J. in the Canadian Propane case,
took the view, I think correctly, that the crux of
the issue between the parties was "what was a
reasonable consideration for the depreciable prop
erty". This is so by reason of the wording of
section 20(6)(g).
The appellant had argued that since the pur
chases had been negotiated on an arm's length
basis and the prices at which the assets were sold
were determined by bona fide bargaining, it fol
lowed that the resultant written agreements ascrib
ing prices to the assets must be conclusive. The
learned Judge did not agree. In his view, the word
"reasonable" in the context of section 20(6)(g) did
not mean the subjective view of the Minister alone
or of the appellant alone, but the view of an
objective observer with a knowledge of all the
pertinent facts. His final conclusion is found in the
following paragraph on page 5029, which has par
ticular applicability to the case before me:
For the foregoing reasons I have concluded that the appor
tionment between depreciable property and something else was
in effect unilaterally done by the appellant and that there was
in reality no genuine negotiated apportionment as a result of
bargaining between the parties to the agreement from which it
follows that the allocations in the agreements are not decisive
of what is reasonable.
It was held that the appellant had failed to
discharge the onus of demolishing the Minister's
assumptions of value.
In the present case I also hold that the defend
ants have failed to discharge the onus of proving
the Minister's assessment valuations wrong. How
ever, after making his assessment on the basis of
valuations submitted by people in his own depart
ment, the Minister engaged Mr. Farstad to make a
formal appraisal of the assets and report. Mr.
Farstad's report was filed as an exhibit by counsel
for the plaintiff who also called him as a witness.
In effect, the Court was invited to consider both
the Minister's assessment and the valuations in
Mr. Farstad's report. This I have done, and as I
have found that Mr. Farstad's figures are more
reliable, I would, but for one circumstance, fix the
figures in his report as the correct figures to be
used in assessing the tax payable. That circum
stance is dealt with at the end of these reasons.
I consider that for the purpose of this judgment
it is only necessary to turn briefly to the case of
Herb Payne Transport Limited v. M.N.R., and
only for the purpose of quoting a few paragraphs
from the judgment of Noël J. in the Exchequer
Court to indicate his views concerning the conclu-
siveness of prices of assets contained in an agree
ment of sale. At page 7 of the Exchequer Court
Reports [[1964] Ex.C.R. 1] and continuing on
page 8, we find the following:
There is no doubt that, ordinarily, the price of an asset
arrived at by bona fide negotiations at arm's length in a
commercial transaction should establish the value of that asset
at that time and place.
However, as we have seen, the evidence discloses that in the
present instance although values appear opposite all of the
depreciated assets of the appellant they had not been agreed
between the parties as establishing the value of the said assets.
These values would, therefore, under the circumstances, be
open for determination under s. 20(6)(g) of the Income Tax
Act which, as we have seen, specifically states that: "the part of
the amount that can reasonably be regarded as being the
consideration for such disposition shall be deemed to be the
proceeds of disposition of depreciable property of that class
irrespective of the form or legal effect of the contract or
agreement;".
The above rule appears to be mandatory and would apply to
any case where a disposal of depreciable property occurs. It
also, in my opinion, would have the effect of permitting evi
dence with respect to the reasonableness of the consideration
for such depreciated property to be adduced notwithstanding
the ordinary rules of evidence which, as suggested by counsel
for the respondent, might apply here to prevent contradiction
by oral evidence of the terms of a written document and this
would be especially so in a case such as we have here where the
purchaser and the appellant, as we have seen, were never "ad
idem" concerning the valuation of assets of the business for the
purpose of the sale of assets.
Near the bottom of page 8, having referred to
the matter of "reasonableness" of prices, Noël J.
said:
There is also no question that if the purchaser and the vendor
acting at arm's length, reach a mutual decision as to apportion
ment of price against various assets which appear to be reason
able under the circumstances, they should be accepted by the
taxation authority as accurate and they should be binding on
both parties.
However, in the present instance, the consideration for the
fixed assets as set down in the reassessment of the respondent
appears to me to be most unreasonable for the following
reasons.
Noël J. then proceeded to examine the evidence
at length including that relating to goodwill, to
show why the re-assessment was unreasonable. In
the end he allowed the appeal in part, but revalued
many of the assets.
I deem it unnecessary to review any of the other
cases referred to by counsel.
The circumstance referred to (supra) which pre
vents me from fixing the valuation figures in Mr.
Farstad's report as the ones to be used in assessing
the tax payable is that by so doing it seems likely
that the Minister's assessment would be increased.
No breakdown of the nature and values of the
contents of the building has been furnished that
would suffice for me to fix the result with accura
cy, but it appears that the higher depreciation or
capital cost allowance percentages permitted on
furniture, furnishings and fixtures than on build
ings would lead to a higher tax assessment than
that made by the Minister.
In the case of Harris v. M.N.R. [1965] 2
Ex.C.R. 653 Thurlow J., in the Exchequer Court,
dealt with a similar situation. In that case the
Minister in error had allowed $775.02 as a deduc
tion for rental expense. On the other hand, it
appeared that $525 should have been deducted as
capital cost allowance. Counsel for the Minister
argued that the proper course would be to refer the
matter back to the Minister to correct both errors.
Thurlow J. did not agree. He said, at page 662:
I do not think, however, that this is the correct way to deal
with the matter. On a taxpayer's appeal to the Court the matter
for determination is basically whether the assessment is too
high. This may depend on what deductions are allowable in
computing income and what are not but as I see it the
determination of these questions is involved only for the pur
pose of reaching a conclusion on the basic question. No appeal
to this Court from the assessment is given by the statute to the
Minister and since in the circumstances of this case the disal-
lowance of the $775.02 while allowing $525 would result in an
increase in the assessment the effect of referring the matter
back to the Minister for that purpose would be to increase the
assessment and thus in substance allow an appeal by him to this
Court. The application for leave to amend is therefore refused.
The Harris case has been followed. I agree with
Thurlow J.'s view of the law on this point. Conse
quently, in the present case the assessment made
by the Minister must stand. The appeals of the
plaintiff are allowed, with costs, and the assess
ments are restored.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.